Volatility Weekly

Volatility Update, 7/14/23

BitOoda Crypto Market Report, 7/14/23

Michael Tauckus

Key Takeaway #1

Key Takeaway #2

Key Takeaway #3

Key Takeaway #4

After three straight days of sideways and low volume trading led to a breakdown in implied volatility, news broke that a NY judge ruled that Ripple’s XRP token is not necessarily a security. This news has given hope that other altcoins may not be considered securities after all. On the back of this ruling, XRP led the crypto space higher, rallying almost 80% and currently up 69.5% on the week. The XRP ruling was most supportive for the altcoin space, but also was the catalyst ETH had been looking for. This was reflected in the outperformance of ETH to BTC with the spread rallying 3.4% to .0639. Much has been made about the enthusiasm around Bitcoin amid multiple ETF applications, which led to an increasing demand for BTC options and upside. Without similar interest and a lack of trading volumes, ETH IV appeared to disconnect from BTC IV the past few weeks. Yesterday’s price rally helped ETH IV stage a comeback from YTD lows printed early in the morning. For the first time in months, ETH option volumes outpaced BTC, with aggressive call buying indicating major short covering. Based on significant declines in open interest, it appears the large ETH call seller of the past few months covered a large portion of shorts in the midst of the rally. The largest prints came in July 2100 calls (13k), December 2200 calls (5k) and March 2300 calls (20K!). More covering was seen this morning, notably in the front month with 18k 2200c and 13k 2100 calls bought, continuing to drive the mean reversion in the ETH/BTC Implied Vol spread. Understandably, BTC has taken a back seat to ETH trade the past 24 hours. With both products currently sitting at YTD highs, representing significant resistance levels, it’s hard to imagine call skew softening ahead of the weekend. Continued covering may indicate a change in philosophy or closing of the book, which would lessen pressure on ETH IV. Conversely, if new shorts are entered next week, we could see more of a sustained low IV regime. Revisiting our trade suggestion from last week, buying the DEC/JUN $40,000 call calendar: This has performed nicely in the rally, appreciating ~$250, a gain of 12%. The calendar has a delta of 10% which contributed a $110 of the profit, with the rest of the profit coming from an appreciation in the spread between the strikes of 1% (Dec 52.55%, M 53.55%). Those with a bullish outlook should feel comfortable remaining in the trade.

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After three straight days of sideways and low volume trading led to a breakdown in implied volatility, news broke that a NY judge ruled that Ripple’s XRP token is not necessarily a security. This news has given hope that other altcoins may not be considered securities after all. On the back of this ruling, XRP led the crypto space higher, rallying almost 80% and currently up 69.5% on the week. The XRP ruling was most supportive for the altcoin space, but also was the catalyst ETH had been looking for. This was reflected in the outperformance of ETH to BTC with the spread rallying 3.4% to .0639. Much has been made about the enthusiasm around Bitcoin amid multiple ETF applications, which led to an increasing demand for BTC options and upside. Without similar interest and a lack of trading volumes, ETH IV appeared to disconnect from BTC IV the past few weeks. Yesterday’s price rally helped ETH IV stage a comeback from YTD lows printed early in the morning. For the first time in months, ETH option volumes outpaced BTC, with aggressive call buying indicating major short covering. Based on significant declines in open interest, it appears the large ETH call seller of the past few months covered a large portion of shorts in the midst of the rally. The largest prints came in July 2100 calls (13k), December 2200 calls (5k) and March 2300 calls (20K!). More covering was seen this morning, notably in the front month with 18k 2200c and 13k 2100 calls bought, continuing to drive the mean reversion in the ETH/BTC Implied Vol spread. Understandably, BTC has taken a back seat to ETH trade the past 24 hours. With both products currently sitting at YTD highs, representing significant resistance levels, it’s hard to imagine call skew softening ahead of the weekend. Continued covering may indicate a change in philosophy or closing of the book, which would lessen pressure on ETH IV. Conversely, if new shorts are entered next week, we could see more of a sustained low IV regime. Revisiting our trade suggestion from last week, buying the DEC/JUN $40,000 call calendar: This has performed nicely in the rally, appreciating ~$250, a gain of 12%. The calendar has a delta of 10% which contributed a $110 of the profit, with the rest of the profit coming from an appreciation in the spread between the strikes of 1% (Dec 52.55%, M 53.55%). Those with a bullish outlook should feel comfortable remaining in the trade.

‍

ATM IV Term Structure

Week on week Implied Volatility is lower, with the exception being July28 expiry in ETH.
We continue to monitor the ETH/BTC IV spread, which historically trades at a premium to ETH.
In the past four weeks, BTC IV has remained above ETH. With some renewed interest in ETH options, this spread is beginning to mean revert, especially in the front end.
Both curves remain in contango, offering time spread selling opportunity(selling longer dated options vs buying nearer expirations).

‍

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Front Month IV Curves

1-month BTC 25 delta puts priced 0.75 vols under ATM, with 25 delta calls priced 4.25 vols over ATM
1-month ETH 25 delta puts priced 0.15 vols under ATM, with 25 delta calls priced 4.75 vols over ATM
Calls in ETH spiked dramatically yesterday, with short call covering driving the change in skew
Discounted puts in BTC represent excellent value for hedging purposes

Figure: ATM Implied Vol by Day
Source: Deribit, BitOoda

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At-the-Money Front Month Daily Implied Volatility

ETH Implied Volatility in the spot month popped almost 7% in the past 24hours, ignited by the XRP court ruling.
The rally in ETH vol moves the July expiration above BTC IV for the first timein over 3 weeks.

‍

ETH Price outperforms BTC on the XRP ruling

Markets traded sideways for much of the week, struggling to find direction.
Heavy volumes drove prices higher as news broke of the XRP ruling.
After underperforming for much of the last few weeks, ETH outperformed on the news, rallying 7% vs a 3% gain in BTC.
Implied Volatility followed suit, with ETH popping as much as 8% in the 7/28expiration after setting a YTD low of 36% early in the morning.

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Figure: 5 Day Futures Chart BTC & ETH
Source: TradingView.com

BTC & ETH breach YTD highs

Both BTC & ETH rallied through recent highs yesterday amid renewed enthusiasm in the crypto space.
Both products sit at significant resistance levels of $31,345 and $1,999 respectively.
Remaining above these levels through the weekend would be supportive fora next leg up toward the highs of April 2022.

Figure: BTC & ETH Technical Analysis
Source: Tradingview.com

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Notable Headlines

Crypto Industry Secures Early Victory in Legal Battle With Regulators (Link)

XRP Overtakes BNB to Become 4th Largest Cryptocurrency; Funding Rates Surge (Link)

Celsius founder Alex Mashinsky arrested and charged with fraud (Link)

Coinbase to Restart XRP Trading After Judge's Ruling in Ripple Case (Link)

BlackRock CEO Larry Fink Talks Up Crypto Demand From Gold Investors (Link)

Cryptocurrencies head for a winning week after sharp rally fueled by Ripple court decision (Link)

It’s like 2021 again as crypto altcoins soar as much as 66% (Link)

Bitcoin will be the currency of artificial intelligence, Arthur Hayes says (Link)

Coinbase sees crypto winter 'thawing' after Ripple’s partial legal victory (Link)

Crypto trading volume down 23% in Q2 as Binance dominance declines (Link)

BlackRock has a ‘responsibility to democratize investing,’ including in crypto, Larry Fink says (Link)

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Disclosures

Purpose
This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.

Analyst Certification
Michael Tauckus, the author of this report hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Conflicts of Interest
This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.

General Disclosures ‍

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After three straight days of sideways and low volume trading led to a breakdown in implied volatility, news broke that a NY judge ruled that Ripple’s XRP token is not necessarily a security. This news has given hope that other altcoins may not be considered securities after all. On the back of this ruling, XRP led the crypto space higher, rallying almost 80% and currently up 69.5% on the week. The XRP ruling was most supportive for the altcoin space, but also was the catalyst ETH had been looking for. This was reflected in the outperformance of ETH to BTC with the spread rallying 3.4% to .0639. Much has been made about the enthusiasm around Bitcoin amid multiple ETF applications, which led to an increasing demand for BTC options and upside. Without similar interest and a lack of trading volumes, ETH IV appeared to disconnect from BTC IV the past few weeks. Yesterday’s price rally helped ETH IV stage a comeback from YTD lows printed early in the morning. For the first time in months, ETH option volumes outpaced BTC, with aggressive call buying indicating major short covering. Based on significant declines in open interest, it appears the large ETH call seller of the past few months covered a large portion of shorts in the midst of the rally. The largest prints came in July 2100 calls (13k), December 2200 calls (5k) and March 2300 calls (20K!). More covering was seen this morning, notably in the front month with 18k 2200c and 13k 2100 calls bought, continuing to drive the mean reversion in the ETH/BTC Implied Vol spread. Understandably, BTC has taken a back seat to ETH trade the past 24 hours. With both products currently sitting at YTD highs, representing significant resistance levels, it’s hard to imagine call skew softening ahead of the weekend. Continued covering may indicate a change in philosophy or closing of the book, which would lessen pressure on ETH IV. Conversely, if new shorts are entered next week, we could see more of a sustained low IV regime. Revisiting our trade suggestion from last week, buying the DEC/JUN $40,000 call calendar: This has performed nicely in the rally, appreciating ~$250, a gain of 12%. The calendar has a delta of 10% which contributed a $110 of the profit, with the rest of the profit coming from an appreciation in the spread between the strikes of 1% (Dec 52.55%, M 53.55%). Those with a bullish outlook should feel comfortable remaining in the trade.

‍

ATM IV Term Structure

Week on week Implied Volatility is lower, with the exception being July28 expiry in ETH.
We continue to monitor the ETH/BTC IV spread, which historically trades at a premium to ETH.
In the past four weeks, BTC IV has remained above ETH. With some renewed interest in ETH options, this spread is beginning to mean revert, especially in the front end.
Both curves remain in contango, offering time spread selling opportunity(selling longer dated options vs buying nearer expirations).

‍

‍

Front Month IV Curves

1-month BTC 25 delta puts priced 0.75 vols under ATM, with 25 delta calls priced 4.25 vols over ATM
1-month ETH 25 delta puts priced 0.15 vols under ATM, with 25 delta calls priced 4.75 vols over ATM
Calls in ETH spiked dramatically yesterday, with short call covering driving the change in skew
Discounted puts in BTC represent excellent value for hedging purposes

‍

At-the-Money Front Month Daily Implied Volatility

ETH Implied Volatility in the spot month popped almost 7% in the past 24hours, ignited by the XRP court ruling.
The rally in ETH vol moves the July expiration above BTC IV for the first timein over 3 weeks.

‍

ETH Price outperforms BTC on the XRP ruling

Markets traded sideways for much of the week, struggling to find direction.
Heavy volumes drove prices higher as news broke of the XRP ruling.
After underperforming for much of the last few weeks, ETH outperformed on the news, rallying 7% vs a 3% gain in BTC.
Implied Volatility followed suit, with ETH popping as much as 8% in the 7/28expiration after setting a YTD low of 36% early in the morning.

‍

BTC & ETH breach YTD highs

Both BTC & ETH rallied through recent highs yesterday amid renewed enthusiasm in the crypto space.
Both products sit at significant resistance levels of $31,345 and $1,999 respectively.
Remaining above these levels through the weekend would be supportive fora next leg up toward the highs of April 2022.